Wednesday, January 18, 2023
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BusinessNine insurance firms buy DBE bond, deadline looms

Nine insurance firms buy DBE bond, deadline looms

Only nine of Ethiopia’s 18 insurance businesses have paid 15 percent of the net income they reported in the previous fiscal year to purchase bonds from the Development Bank of Ethiopia (DBE), with the deadline set by the central bank getting closer.

The National Bank of Ethiopia (NBE) introduced a directive for the bond purchase by banks and insurance companies last year and set December 9, 2022, as a deadline to fulfill the mandatory requirement that demand insurance company allocate 15 percent of their net income to buy DBE’s bond. Banks are required to dedicate one percent of their outstanding credit to purchase the bond. They have already invested 10 billion birr by the end of last fiscal year for the same purpose.

If companies fail to pay before the deadline, they will incur a penalty, according to the directive. The directive states that insurance firms must invest in the bond with a three-year maturity date. The investment bond aims to mobilize the fund to sectors it deems are policy priorities, such as manufacturing, agriculture, energy and tourism, according to Yohannes Ayalew (PhD), president of the Bank.

DBE pays a nine percent annual interest rate on these bonds, two percentage points higher than what the banks pay to depositors. It lends borrowers an interest rate of 11.5 percent, much lower than the 19 percent average that private banks charge. However, insurance firms claim that the requirement would put the industry under pressure. They have also asked the central bank to reduce the minimum amount required.

The Association of Ethiopian Insurers, which initially called for the mandatory requirement to be eliminated, later asked for a change in the percentage of their net income that would be used to buy the bond. They offered to allocate between five and seven percent of their net income.

As it stands, the requirement will have severe negative impacts on the growth of insurance companies while also discouraging much-needed investment in the industry, according to an official who spoke to The Reporter on condition of anonymity. “Nevertheless, the central bank rejected the request from the insurance industry,” the official said.

For Yohannes, there is a gap in understanding about the investment bond.

Insurance companies, particularly the smaller firms, are struggling to meet the requirements, Ebsa Mohamed, an insurance expert managing Alpha Consultancy, said.

“It is unfair to impose such a rule while the insurers need support as their income is significantly low due to the low penetration of insurance in the country,” said Ebsa, adding, “The insurers tend to compete using price, and the industry is characterized by unfair competition, which prevents the firms from growing.”

The insurance industry is not the only one subject to the new rules. Commercial banks are also obliged to invest one percent of their annual loans in DBE bonds. “Ethiopian Insurance Corporation and Commercial Bank of Ethiopia are expected to make a bigger contribution than private ones,” Yohannes said.

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